Apple Loses: Judge Finds Price-Fixing in E-Book Case

By Andrew Albanese
|

Jul 10, 2013

In a major blow, Judge Denise Cote today ruled that Apple did indeed collude with five major publishers to fix e-book prices in 2010. The decision comes following the June 20 close of Apple’s high profile court battle.

“Based on the trial record, and for the reasons stated herein,” Cote wrote in a sweeping 159-page decision (read the complete US v Apple decision here), this Court finds by a preponderance of the evidence that Apple conspired to restrain trade in violation of Section 1 of the Sherman Act.” Next up, the judge will begin the process of determining injunctive relief to settle the federal charges, and damages in the state and consumer cases.

As PW had reported, the case did in fact come down to whether Apple would be able to persuade Cote that the facts in the case should not be analyzed as a per se violation of the Sherman Act. A per se violation essentially means that the facts of the case establish conduct so clearly outside the law that the court condemns it without regard to motivating factors (for example, to combat Amazon’s below-cost pricing). On this crucial point, Apple failed.

“Here we have every necessary component,” Cote ruled of her decision to analyze the case as a per se violation. “With Apple’s active encouragement and assistance, the Publisher Defendants agreed to work together to eliminate retail price competition and raise e-book prices, and again with Apple’s knowing and active participation, they brought their scheme to fruition.”

In the final analysis, the case wasn’t even close. In its defense, Apple had argued on three main points, and lost soundly on all three.

First, Apple argued that there was no conspiracy to raise prices, and that it was the publishers who in fact raised prices. Cote was thoroughly unmoved by this argument.

“Apple is correct that the conspiracy required the full participation of the Publisher Defendants if it were to achieve its goals. It is also correct that the Publishers wanted to change Amazon’s pricing policies and to raise e-book prices,” Cote observed. “But, those facts do not erase Apple’s own intentions in entering into this scheme. Apple did not want to compete with Amazon on price and proposed to the Publishers a method through which both Apple and the Publishers could each achieve their goals."

Cote added that the record is “equivocal” on whether Apple itself desired higher e-book prices, but “unequivocal” that Apple “embraced higher prices.”

Apple’s second line of defense was that Amazon and other retailers actually embraced the agency model, as evidenced by their adoption of agency deals nearly identical to Apple's, contracts which even included MFN’s. Cote soundly rejected that argument as well.

“The issue is not whether an entity executed an agency agreement or used an MFN, but whether it conspired to raise prices,” she wrote. “Amazon was adamant in its support of retail price competition and lower prices. It did not relinquish its control over retail pricing easily.”

And last, Apple sought to show that the e-book market suffered no ill-effects, and in fact, that its agreements were pro-competitive. Again, Cote was completely unmoved. As she did in her approval of the initial three settlements with publishers, she stressed that even if Amazon was foreclosing competition through low pricing, that does not justify collusion.

“This trial has not been the occasion to decide whether Amazon’s choice to sell NYT Bestsellers or other New Releases as loss leaders was an unfair trade practice or in any other way a violation of law,” the judge wrote. “If it was, however, the remedy for illegal conduct is a complaint lodged with the proper law enforcement offices or a civil suit or both. Another company’s alleged violation of antitrust laws is not an excuse for engaging in your own violations of law.”

In the final analysis, Cote concluded, “it is essential to remember that the antitrust laws were enacted for ‘the protection of competition, not competitors.'"

The question in the Apple case, she added, "has always been a narrow one: whether Apple participated in a price-fixing scheme in violation of this country’s antitrust laws." The answer, she found, is yes.

"Apple is liable here for facilitating and encouraging the Publisher Defendants’ collective, illegal restraint of trade. Through their conspiracy they forced Amazon (and other resellers) to relinquish retail pricing authority and then they raised retail e-book prices. Those higher prices were not the result of regular market forces but of a scheme in which Apple was a full participant.”

Throughout the opinion Cote made numerous observations on the proceedings in her court. She criticized the publishers and Apple executives not only for what she clearly views as their participation in a conspiracy, but also for their lack of credibility on the stand, calling out Macmillan CEO John Sargent and S&S CEO Carolyn Reidy by name as among the most “unreliable” witnesses.

"Their demeanor changed dramatically depending on whether Apple or the Plaintiffs were questioning them,” Cote observed. “They were adamant in denials until confronted with documents or their prior deposition testimony; instead of answering questions in a straightforward manner, they would pick apart the question and answer it narrowly or avoid answering it altogether."

In the end, the poor performances on the stand helped doom Apple. Indeed, given the vast amount of documentary evidence, Apple needed its witnesses to strongly rebut the facts, but they did not. Cote acknowledged that given the unreliable witnesses, her findings were “informed by the documentary record, the circumstantial evidence, including an understanding of the competitive landscape in which these events were unfolding, and that portion of each witness’ testimony that appeared reliable and credible.”

In addition, Steve Jobs’ words came back to haunt Apple. “Compelling evidence of Apple’s participation in the conspiracy came from the words uttered by Steve Jobs, Apple’s founder, CEO, and visionary. Apple has struggled mightily to reinterpret Jobs’s statements in a way that will eliminate their bite. Its efforts have proven fruitless.” In her view, Cote write, Jobs’ statements offered “powerful evidence of conspiratorial knowledge and intent.”

At press time, Apple had yet to issue a response. The Department of Justice, however, called the decision "a victory for millions of consumers" who choose to read e-books.

“Companies cannot ignore the antitrust laws when they believe it is in their economic self-interest to do so," reads a statement from Assistant Attorney General Bill Baer. "This decision by the court is a critical step in undoing the harm caused by Apple’s illegal actions."

Apple, of course, is likely to appeal. "It's pretty likely in my mind that Apple will appeal to the Second Circuit,” observed Christopher Sagers, a law professor at Cleveland State University who has followed the case closely. “I think it's extremely unlikely, however, that the Second Circuit would do anything except resoundingly affirm in all respects. Apple’s only meaningful hope would be to convince the court that there was a mistake of law in finding the agreement per se illegal, but I put the odds of success on that point at [virtually zero]."

As for the judge’s "fact rulings," they will be “essentially unassailable on appeal,” Sagers says. “In any case it’s very difficult to appeal factual judgments, but in this case it will be exceedingly hard because you’ve got a 160-page opinion that is extraordinarily, meticulously detailed as to the findings of fact.”

Assuming the case strikes out on appeal, the remedies will eventually be resolved in one of two ways, Sagers says. “Apple might cry uncle and just go ahead and negotiate an injunctive remedy with the government and money damages settlements with the state AGs,” he suggests. Or, there will be another “mini-trial” in which the court will receive written submissions by the parties and may or may not hold a hearing. There may also be a public comment period.

Sagers says he doubts Apple will negotiate at this stage, and expects a damages trial.

“Apple does not really have much to lose by putting off being stuck with remedies until after an appeal, which should take about a year or so,” he says. Ultimately, any remedies will be court-ordered by the court, and most likely will fall along the lines of earlier settlement, although the DoJ could be more aggressive.

"A big open question," Sagers adds, “is how intrusively DOJ can get up into Apple’s other businesses.”

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